Archive for November, 2008

Many entrepreneurs approach us with a predetermined, fixed value proposition for the product or service that they are developing. They feel they have chosen the best channel of distribution, know competitive pricing and have some understanding of their margins. Their business plan is built around these assumptions. They are usually wrong.

Price is determined solely by what a purchaser is willing to pay for goods or services. The mistake we see most often is that the entrepreneur will not adjust to market realities. Product valuations are often determined by a set of circumstances that are in constant flux, rapidly changing supplies and costs for raw materials, new disruptive products and technologies and overall economic conditions are only a few of the determining factors that must be considered when pricing goods and services.

If you collected impressionist art, what would you pay for an original work by the Spanish master Pablo Picasso? The fact that such pieces are exceedingly rare would certainly effect the valuation of the painting. The art worlds implied assertion that a Picasso piece is invaluable, no matter the period, the subject or the medium he chose to utilize for the artwork insures stratospheric bidding for the piece. Entering the transaction, any knowledgeable buyer understands that the cost to walk away with the picture will be very steep.

In 1932 the Winter Olympics were held in Grenoble, France. After the closing ceremony of the games a group of the most famous sports writers of the day decided to have one last night of frivolity before returning to the United States. Such luminaries of American sports pages as John Tunis, Ring Lardner and Grantland Rice were among the party determined to say “au revoir” to the games with one last expense account funded party.

At that time credit cards were non-existent. International travelers utilized wire transfers to pay their expenses. This method of payment required the use of telex machines and correspondence between specific banks on the itinerary of the traveler. With great distances, time zones and language barriers this system was ponderous and quite often broke down.

The group of sportswriters had chosen the Auberge Napoleon for their soiree. This is one of the oldest and finest restaurants in all of France. They commenced to have a fine old time. In the 1930’s sports writing was a prestigious desk at any newspaper. The lead scribes of the day were widely celebrated and well known for their propensity to enjoy fine grog and vittles at the end of a tough day covering games.

The dinner at the Auberge Napoleon was quite an extended affair. Hors d’hourves and brandy were followed by foie gras and champagne. The group was quite consumptive and as they imbibed more and more, the tab mounted ever more skyward, though none of the boys was paying much attention.

Finally, well after midnight, they asked the maitre d’ for the check. Upon presentation they gulped, the tab was astronomical, more money than they had between them as they scrounged through their wallets seeking to come up with the amount needed to cover their tab. The banks and telex offices were closed so they had no way to access additional funds at that late hour.

Upon the sportswriters admitting to the maitre d’ that they could not cover the cost of their luxurious meal, the owner of the Auberge Napoleon was summoned. At that time non-payment of a restaurant or lodging bill in France was an offense that was often settled with immediate incarceration. The differential between the amount of cash the group could pay and the amount of the check was substantial. The atmosphere grew tense, fueled not a little by the heavy alcoholic imbibing that most of the writers had inflicted upon themselves.

In a corner of the mostly deserted restaurant sat a small, swarthy man wearing a woolen cap. The man was enjoying dinner with a beautiful young woman. They watched with some alacrity as the confrontation between the owner of the Auberge Napoleon and the American sportswriters unwound. The man took a linen napkin from a table, removed an ink pen from his jacket pocket and proceeded to draw on the napkin.

He called the restaurant owner over to his table. Holding up the linen napkin, he proceeded to speak in French to the owner and this seemed to calm and relax the agitated innkeeper. The owner took the napkin, bowed to the small man and returned to the table of the clearly embarrassed Americans. He smiled wryly and advised the group that they were free to go, their obligation had been satisfied.

“What has just happened”, asked Ring Lardner? The owner of the Auberge Napoleon held up the linen napkin and showed the sportswriters the image that had been drawn by the little man. “This is the “Dove of Peace”, an original and signed by the master Pablo Picasso himself. It will be hung in my restaurant for all of my patrons to enjoy for many years”, said the owner. “Monsieur Picasso has satisfied your check with his considerate gift”.

A napkin, an image, an original, signed by one of most famous artists of all time, had satisfied a simple restaurant tab. What would such an image have been worth if sold in a gallery? Certainly, exponentially more than the price of a luxury restaurant meal.

Pablo Picasso was the ultimate entrepreneur. He marketed his work, his image, and his legend with gusto until the day he died. He gained fabulous wealth and incredible fame. His place in the pantheon of great artists is assured. Decades after his death his work continues to be among the most highly sought after and valued in the art world. However, at the onset of his career Picasso lived in poverty. His work was not commercial. He priced his work to the perceived market valuation for an unknown artist.

Many elements must be considered when establishing value propositions for new products. Preconceived pricing models must be based on real time, real market assumptions that can be quantified. Whether a new offering is commercially successful in the mass market or in more limited distribution will be determined only after weighing all applicable expense and production issues.

Whether in business, warfare or affairs of the heart knowledge, the more the better, is often the most crucial element in determining event outcomes. The ability to know what the competition for a business deal is strategizing is potentially game changing. A General upon learning details of a rivals battle plan gains immense advantages in plotting counter-strategy. Knowledge is often not quantifiable, but it is invaluable.

One of the most famous and consequential uses of real time knowledge occurred in Europe in 1815. Early in the 19th century information obtainable through communication channels about distant events was painstakingly slow to arrive. Roads were rough, unfinished, really little more than cart paths. There was no wire transmission or speedy organized courier services for delivering messages over vast distances. Word of the outcome of a battle, treaty or an important political affair could takes weeks or months to arrive where the result was most keenly anticipated.

The Battle of Waterloo is possibly the most famous military engagement in history. The battle site, the tiny, remote Belgian village of Waterloo, is synonymous today with one’s “final act”. Waterloo became Napoleon Bonaparte’s denouement. His inglorious defeat by the British forces, commanded by the Duke of Wellington, expedited his exile to the tiny island of Elba and the decline of France as a military power for almost a century.

Prussian, Austrian and Russian armies had allied to fight with the British against Napoleon. All of these great armies, moving across vast swaths of Europe terrain needed extensive provisioning, arming and logistic support to maintain troops as they girded for the great battle. This was an incredibly expensive enterprise. Massive funding was required to support the campaign.

The Rothschild banking family was already famous across most of Europe for providing a secure funding source for national governments. The Rothschild’s had established five branches of their enterprise. The largest, most important were based in Paris and London. The final Napoleonic war was largely funded by Nathan Rothschild of the family’s London branch. This house had provided large sums to both the British and the French. The Rothschild’s were famously indifferent to rulers and governments. Nathan Rothschild once famously remarked, “The man who controls the British money supply controls the British, and I control the British money supply”. His goal was to profit no matter whom was in power or won a war.

Nathan Rothschild knew that early knowledge of the winner at Waterloo, details of the battle, the severity of the loser’s defeat would be invaluable in financially manipulating markets to profit from the result. The family had invested heavily over the decades in field agents that forwarded tips and messages, fast packet ships and trained carrier pigeons to speedily deliver notes.

The arrival of the carrier pigeons in London with specific battle results from Waterloo provided Rothschild the information he needed to begin to plant rumors. Initially he spread the word that the British had lost. Investors began to adjust their bond and security positions in reaction to this negative news. Rothschild took opposite positions, and then, he strategically released the actual truthful news that Wellington had vanquished Napoleon. This enabled the family to profit on both sides of the trades. It is estimated that the Rothschild family extrapolated an increase in wealth of 20 times their pre-war capital.

The foresight to train a winged air force of carrier pigeons proved fortuitous and extremely profitable for the banking house of Rothschild. The edge they enjoyed in receiving real-time information, and spectacularly profiting from the knowledge, became legendary and only increased the perception that they were a family of financial Merlin’s. Their power and wealth has multiplied exponentially in the past 200 years and has been maintained to this very day.

In modern business and finance, the ability to glean information about competitor’s plans, information that will affect asset valuations and marketing strategies is invaluable. Governments spend billions of dollars trying to steal state and commercial secrets. Private investigators are used every day to scope out the fidelity and affairs of married spouses. Information is power.

Entrepreneur’s can learn an important lesson from this chronicle about the Rothschild’s use of carrier pigeons. If your project has true commercial value it must be protected. You must assume that there are people working at the same time on a similar opportunity. Time is not your friend.

Whether you can uncover a competitor’s plan or an adversary learns your project’s details, the first owner of knowledge stands to maximize profit. Placing second in this process is a sure path to losing the crucial first to market product advantage. The Rothschild’s earned fabulous riches from simply learning the outcome of a battle before competitors. In order for entrepreneur’s to successfully profit from their efforts they must harvest every bit of relevant and available knowledge as quickly as possible.

Knowledge is invaluable, but it must be secured and utilized with diligence and due haste.

Studying the history of business is a fascinating exercise. The origins of many of the finance and business products that we utilize today were perfected during centuries past in countries sprinkled far and wide around the world. One of the most important, inventive and skilled business cultures was created in the Netherlands during the 17th century.

As the world was discovered, mapped and colonized by the early Spanish and Portuguese explorers, new trade routes were pioneered and many high value products came to market in Europe as demand for exotic imports exploded. This boom in international trade required a corresponding expansion of novel financing mechanisms to fund this commerce.

The first great merchant traders were the Portuguese. They used Lisbon as their trade center. However, their trade apparatus was primitive even for the age. The principal imports and the most valuable products of 1600’s trade were East Asian spices and silks. Because the Portuguese were inefficient in distribution and in financing methods the Italians, Spanish and Dutch were all interested in circumventing Portuguese merchants and overtaking their trade relationships.

The Dutch were particularly enterprising. They were also committed to espionage. Use of spies enabled the Dutch to discover the state secrets of the Portuguese trade routes. With knowledge of the well documented Portuguese trade routes in hand, a great level of risk was removed from the international commercial trade equation.

In 1598 Jakob von Neck organized a group of five companies into a trade expedition. He left with 22 ships, visited the Spice Islands in Indonesia and managed to negotiate and secure a cargo of pepper and other valuable spices. By the time he had returned to the Netherlands, von Neck had lost eight ships but still earned his investing partners a 400% return on their stakes.

At that time each voyage was a stand-alone business entity. Piracy, disease, weather and simple navigation error made these trips highly speculative. Also, the commodities being traded were highly elastic in valuations. A successful voyage could generate staggering profits, but losses were common and could be steep.

The Dutch saw opportunity to create a cartel. The result was the Dutch East India Company formed in 1602. This was the world’s first multinational company. The enterprise was the worlds first to be owned by investors through the issuance of stock equity.

The Dutch East India Company did not simply send ships to negotiate one off trade deals. The Company became fully integrated to mitigate risk and maximize profits. In addition to owning, manning and operating a shipping fleet, the Company fielded a phalanx of trading agents in countries all over Asia. They built and maintained fixed trading posts near the farms, plantations and sources of production of their trade goods. Having a permanent team of buyers, sellers and facilities on location cemented trade relationships at a time when communication was horribly inefficient. This gave Dutch traders huge advantages over competitors.

The Dutch became ensconced in the regions they cultivated for trade. In addition, owing to the immense travel distances required to complete each voyage, they established a system of logistics, strategically placed supply outposts, repair facilities and provisioning points to support the growing ship traffic that the Dutch East India Company maintained. The outposts were dotted along the African coasts, Madeira, Madagascar, India and Indian Ocean Island Archipelago’s. The presence of these commercial facilities only served to increase trading opportunities for the Company in regions where these plants were positioned.

For almost 200 years the Dutch East India Company paid a dividend to shareholders of 18%. This was the most valuable enterprise in the world at that time. The success of this business model made tiny Holland the richest state on earth. They pioneered the use of letters of credit, bills of lading and receivable financing. These, and many other finance mechanisms created by the Dutch, enabled this tiny kingdom to enjoy status as one of the world’s great colonial powers while much larger nations stumbled and declined.

For 200 years the Dutch East India Company was the international gold standard for corporate governance, performance and profitability. To this very day, the trade routes, trading terms and conditions, and marketing techniques perfected by Dutch merchants are in use. This entrepreneurial nation is an example that modern states can study to learn the massive positive possibilities inherent in creating open trading systems.

Almost every living individual is being effected adversely in some way by the international economic meltdown we are experiencing today. The genesis of this severe financial downturn is attributed to the United States government encouraging the expansion of homeownership to people who would have historically been deemed unworthy of obtaining credit. The banking systems participation and eagerness to leverage credit risks by extending loans to people with poor credit histories is the principal cause of the current sub-prime mortgage crisis.

Historically, the bursting of the credit bubble follows a long and dubious line of similar scandals. Greed, hubris and suspension of common sense and disbelief are always present before the hen comes home to roost after the gravy time has ended. The panic of 1908 in the United States, the worldwide Great Depression and the implosion of the technology stock bubble in the late 1990’s are memorable examples of euphoric periods followed by great loss and assignation of blame as to the causes of these financial busts.

These peaks and troughs in economic fortune are not unique to modern times. One of the earliest documented financial crazes was the Dutch Tulip Mania in the 17th century. The Dutch, being a tiny, mercantile nation, surrounded by larger, stronger empires were the earliest creators of trade policies and sophisticated financial products. One of their most creative vehicles was the introduction of the futures market.

Tulips were introduced into the Dutch economy and agronomy early in the 17th century. They quickly became prized for their beauty and the floral engineering that created many unique, exotic varieties of tulips. An exchange mechanism developed for speculation in the valuations of the various strains of bulbs. By 1637 a full-scale mania had erupted in evaluating future tulip bulb harvests.

Records from that period are sketchy, but it is known that a single Viceroy Tulip bulb was valued under contract for between 3000 and 4200 Dutch florins in 1637. Contrast this with the annual wage of a skilled Dutch craftsman of 150 florins per year. Isn’t this a definitive example of excessive senseless mania?

The Dutch referred to such trading contracts as “wind trade”. This was because no one ever actually took possession of the tulip bulbs. They simply owned a piece of paper, a contract that documented their claim on the tulip bulbs. Does this example of financial engineering ring any bells today in our current distressed situation?

The popularity of the tulip trade, and the amazing returns, mostly paper gains that were realized by the early speculators created a stampede of inexperienced, gullible speculators. Noblemen, farmers, sausage makers, chimney sweeps and day laborers began to speculate hoping to turn a few florins into exponentially huge investment returns. Of course, the last investors in, were the most harshly abused by the implosion of the tulip bulb speculative bubble. This is true in all bubble cycles.

The British economist Charles Mackey wrote a tome in the 18th century cataloguing the history of the Dutch Tulip Mania. His “Extraordinary Popular Delusions and the Madness of Crowds” remains in print to this day. Business schools and economists refer to Mackey’s study of the herd mentality of people during manias. Nevertheless, though Extraordinary Popular Delusions is still studied, its lessons have hardly been taken to heart.

The greed and hubris that are always present in manias too often define the human condition. People tend to see someone profit from an enterprise and try to emulate their perceived success. This engenders ever more people attempting to participate in the affair and the result is a panic, a mania, a bubble, then disaster.

The no money down payment, zero document loans, offered in the last decade created a completely different type of borrower and lender. The borrowers have no skin in the game. They get to possess a home in which they have no equity. As long as their condition is stable they can maintain possession. However, if their fiscal condition recedes, or the value of the property declines, they are in deep trouble. Foreclosure is a reasonable action for them to undertake to simply walk away from a gamble that did not work out for them.

The lenders have suspended proper underwriting standards in order to induce entry into these risky home sales transactions. They have little skin in the game, because they have conceived exotic packaged investment vehicles where mortgages are bundled and sold to investment speculators all over the world. The owner of the mortgage is actually unknown to the mortgagee, or even the originator of the loan. The loan originator collects their fees and offloads the loan obligation from their balance sheet. The risky transaction is now someone else’s responsibility.

As a result we have endured a period of fake prosperity built on credit swaps, personal irresponsibility, corporate irresponsibility and governmental corruption. The mania of our time is cheap credit. This bubble has burst, and every homeowner faces shrinkage in the valuation of their property because of the greed of speculators and the attempt of government to secure homeownership for people who should be renters. Community banks and credit unions that have maintained high lending standards are being hurt because of the recklessness of the giant money center banking institutions. Retirees and prudent investors have seen their savings and investments slaughtered because of the inane greed and corruption of others.

The 1990’s technology stock bust decimated a generation of people who came to believe that investing in the inter-net was the new “Holy Grail” for prosperity. Startup companies with no sales, no balance sheets and inexperienced management were given huge market valuations. Investors were advised that the tech boom was just in the first or second inning of this nine inning game. Brokerage firms provided guidance on equities that they actually made markets for. This bit of double dealing lead to constant buy calls on tech firms stock that insiders knew had no prospects for success.

The Dutch Tulip Mania, the Mississippi Company, the South Seas Company, the South African Milk Culture craze and the many modern crazes, Ponzi schemes and asset bubbles that we continue to experience are testament to man’s inability to control emotions. Greed, power and wealth are aphrodisiacs for many. We are imperfect beings, susceptible to herd mentality, even when we have knowledge of history’s lessons and could apply these to spare ourselves the pain of participating in activity that will assuredly lead to great pain and loss. Discipline, responsibility and thrift are essential to long term success.

One of the great benefits we enjoy about the consulting work we do is having the opportunity to review the inventiveness of hundreds of entrepreneurs each year. It truly is amazing how many of these creative talents push the envelope of novelty. There is no such reality as the oft stated: “I have seen it all”. None of us have seen it all, as the volume of freshly executed innovative products and concepts being nurtured, is never ending.

And yet, so few of the projects we review ever make it past our initial critique and pre-product development criteria. They will never become widely distributed products, successfully sold in the contemporary marketplace. There are many reasons for this. One reason seems to occur more than most.

Many entrepreneurs become so enamored of their vision and perceive the markets will have positive acceptance for their item that they suspend rationality. We have a term for this malady: “falling in love with the product”. Love is a wonderful emotion. However, it can blur rational thought. The process of gaining purchase into hyper-competitive markets and successfully commercializing new products requires a steady, realistic, but passionate vision. Total commitment to detail and identifying an unfilled market niche, one with scalability, is essential to successfully selling to retailers and consumers.

Very early in my career as an entrepreneur, I made the mistake of “falling in love with my product”. I had created a unique cosmetic accessory product. I was able to bootstrap distribution into almost all of the major department stores in the United States. Then I expanded and sold the product internationally through country specific distribution agreements. Seeing your novel product creation on store shelves in the world’s finest emporiums, such as Marshall Field’s, Bloomingdale’s, Macy’s, Nordstrom, Preciados, Harrod’s and Selfridges was more gratifying than can be described.

However, I did not spend enough time building my Company. I was a single product business. Initially sales were lucrative, re-orders were positive. I was attempting to handle sales, marketing, product development, operations and logistics. I was too close to my product to recognize my shortcomings and the limit of my resources.

Nevertheless, I had penetrated a difficult, sophisticated market. I was a real entrepreneur. I had achieved a modicum of success and had gained the knowledge necessary to launch more companies and products in the future. I learned from my mistakes.

Most of the new product submissions we receive come from first time inventors. Every entrepreneur is a novice at least once. They believe they have identified a need, created an answer to that need and are prepared to sell their item for millions of dollars to big box retailers or investors. It almost never works out that way. Here are a few anecdotal examples that prove this point.

Items like the “arm mitten” are too narrowly positioned to ever achieve mass- market scale. The “arm mitten” is a patented product that is a simple sleeve the driver of a car places over their left arm, to protect the arm from sunburn. Air conditioning, high speed driving with windows closed for wind noise mitigation and safety glass treated with UV inhibitors all posed massive hurdles to the potential for “arm mitten” success.

Consider the “beach boot” for negotiating sandy terrain. This boot, equipped with tank-like tracks attached to the sole and a miniaturized motor roll the wearer over the sandy beach surface. Why walk over sand when you can roll? Why walk barefoot when you can ensconce your feet in hot, sweaty boots at the seashore? Not much upside here!

The “insomniac helmet” was a sleep aid, sort of. There is a small battery powered motor humming in the helmet and the unit massages your head with rubber fingers until you fall asleep. The straps utilized to attach the “insomniac helmet” to the users head look like preparation for capital punishment. Now I like a neck massage as well as the next guy, but this Rube Goldberg contraption would make falling to sleep a nightmare.

The “cup o golf” was the proposed answer to every duffer’s hope for improving the golf swing. A steady head is crucial to a fine golf swing.

The “cup o golf” was a little cup, attached to the bill of the cap. The cup contained a little ball tethered to a string. When the head dropped or moved the ball rolls out of the cup, and dangles annoyingly in front of the golfer eyes, thus conveying that the swing was imperfect. Some players, using the “cup o golf”, could take nine hours to play a round, and they wouldn’t be good company in the clubhouse bar after the experience.

Another example of an inventor’s blind love in their product was the “dad saddle”. This item took the papoose pouch that parents use to carry infants on their backs to new heights, or lows. The “dad saddle” was invented to enable dad’s to carry 10 or 12 year olds on their back without perpetrating excessive lumbar damage. The “dad saddle” is a leather waist strap that the bigger pre-teen can stand on and hold onto padre’s neck. Cool! Bonding forever!

Each of these items is patented. Each of these inventors, and thousands more, spent considerable time, energy and some capital on their ideas. They had really “fallen in love with their invention”. Unfortunately, the inventor’s view of their product is irrelevant in the long run. The marketplace is the final and only arbiter that counts in measuring whether offerings are truly novel, commercial products. Sales equal confirmation of entrepreneurial assumptions about products.

Successful entrepreneurs must treat their inventions as if they are always works in progress, because they are. They will know what the product’s strengths are. These are usually obvious. Aggressively seeking out the flaws in the concept and addressing and improving these weak spots are essential to achieving success. If you are “in love with your product” you will find it much more difficult to edit, redesign or change direction as needed. If this is so, you will fail.

Many sterling companies have attained great heights in the last 100 years, only to plateau, decline and disappear. Bethlehem Steel, American Motors, Montgomery Ward, PanAm, TWA, Faberge and Marshall Field are prime examples of famous companies that no longer exist after enjoying generations of success. There are hundreds of other examples. Why do organizations expire after gathering such power?

Currently the three American automobile giants are staring at an agonizing death by a thousand cuts. Ford, General Motors and Chrysler are case studies in how to lose direction and implode. They have not responded to changing market conditions, agreed to unrealistic and unfavorable labor and dealer contracts, been indifferent to product styling and let the competition assume a perceived advantage in quality and price. For these, and many more reasons, their future is very hazy.

At one time, these companies were considered great examples of superior American management. Their international reputations were among the highest enjoyed by business anywhere. One of the great suppliers to the auto manufacturers was Firestone Rubber Company. Firestone’s tale of decline is cautionary.

Leonard Firestone built his eponymous tire and rubber production company during the early 20th century, riding the coattails of the burgeoning American automobile industry. Firestone was the gold standard in tire production. Its management was considered the best of the five American tire manufacturers. As the century progressed, the company prospered greatly but grew arrogant. The business developed a strange aversion to new product development.

In the 1960’s Michelin, a French tire manufacturer, developed the first radial tire. Firestone decided to stick with belted tires. The advantages of radial tires were soon obvious and the world’s auto companies gravitated quickly to these new tires. Firestone’s American competitors Goodyear, Uniroyal, General Tire and tiny B. F. Goodrich tried to compete by introducing belted bias tire technology. They were unsuccessful in this effort and soon decided to jump into the radial business. The great Firestone Company was alone, and very late to get into the radial game.

It took Firestone until 1972 to attempt to market radial tires. A major mistake was made when the management of Firestone decided to simply rework belted tire production lines to produce radials. They decided to take this route to minimize capital expenditures. Nevertheless the historic goodwill the company had accrued made Firestone Steel Built radials the fastest growing tire in the world in the 1970’s. Unfortunately the company had compromised quality in their radial tire production process. The result was the largest tire recall in history in 1978 because of safety concerns. The company became a favorite target of consumer groups.

By 1988 Firestone was exhausted from the radial battles. The Firestone Tire and Rubber Company was purchased that year by the giant Japanese tire manufacturer; Bridgestone. This left only Goodyear as an American owned producer of tires. Why had an iconic, historically well managed company, reacted so disastrously to competition and new technology?

The best answer, and it applies to all fallen giants, is active inertia. Large companies become inert, listless, and ponderous. Their historic corporate relationships become blinders. Values harden into dogma’s, we have always succeeded doing things this way, so we will continue to do things this way. Corporate processes and policies harden into routines.

Leonard Firestone was a visionary. So was Charles Revson (Revlon), Alfred Sloan the architect of General Motors, Henry Ford, Juan Trippe at PanAm and Howard Hughes at TWA. These companies were their heritage. As the businesses evolved into public companies and the entrepreneurs who had had the visions to create and nurture their success retired or died a corporate malaise can set in. Businesses die if this is allowed to happen.

The United States government is the best possible example of failure. This enterprise is structured to fail. It is wasteful, duplicitous, mission confused and counterproductive. Money cannot be accounted for, results are not quantifiable and responsibility for program failures is never assigned. The government is not created to solve problems, it is organized to institutionalize and perpetuate problems. This is why the bureaucracy enjoys never ending growth, even as so little is ever accomplished.

History is the best teacher. Those who do not learn the lessons of history are bound to repeat their mistakes. This piece could have been written about any one of a hundred formerly iconic brands or businesses that failed. The failures are readily available as teaching tools. Hopefully our leaders will start to review some of these case histories before deciding which industries are to be winners and losers.

One cold evening in San Francisco in 1905, 11 year old Frankie Epperson went to bed, forgetting about a fruit drink he had left on the porch. When he awoke the next morning and went out onto the porch the fruit drink, with a stir stick in the cup had frozen during the unseasonable frigid night. Frankie had stumbled into what would evolve into the “popsicle”.

For 18 years Epperson did nothing with his discovery. Finally in 1923 he filed a patent for the “epsicle”, later renamed the “popsicle”. Frank Epperson subsequently sold the rights to his patent to the Joe Howe Company of New York on a royalty basis. Later, Epperson designed the double stick “popsicle” which enabled children to share the treat. His invention was the inspiration for fudgesicles, creamsicles and other frozen sweets delivered to consumers on a birch stick.

The evolution of this range of stick based frozen treats is a classic example of an initial divergent product that provided the seed for a host of convergent extensions. Frank Epperson’s original frozen fruit tasting ice, packaged on a stick was a truly novel invention. Nothing like it existed at that time. The later iterations of the “popsicle”, ice cream, sherbets and fudgesicles simply were convergent products, utilizing the novelty of Epperson’s stick to deliver the product to consumers.

Divergent products typically achieve the greatest commercial success. They are first, novel, create new product categories and often become generically accepted by consumers. Convergent, or knockoff products, also can enjoy commercial success. However, they are typically recognized as simple extensions to the uniquely crafted divergent products that were their predecessor.

Frank Epperson never fully enjoyed the commercial benefits of his invention of the “popsicle”. His tasty frozen treats have sold billions of units. The rights to the brand name and the product have been sold numerous times to various companies and conglomerates. Mr. Epperson died in 1983. He lived a very mundane life, never enjoying the riches his invention provided for others.

Nevertheless, a very aware 11 year old boy, never forgot an accidental confluence of taste, form and nature and provided the world with one of life’s simplest pleasures; the “popsicle”. His invention is an example that age has no bearing on creativity. Entrepreneurs are grown in every stripe, creed, gender and color. Inventiveness knows no boundaries.

During the Civil War years of the 1860’s the Seventh Day Adventists opened the original Western Health Reform Institute in Battle Creek, Michigan. This religious group was keenly interested in healthy living and undertook some of the earliest research on the benefits of foodstuffs naturally derived from Native American crops. The result was their creation of the earliest breakfast cereals.

For the rest of the 19th century the Seventh Day Adventists consumed their breakfast cereals made from oats, corn, wheat and sorghum. They never really attempted to fully commercialize their recipes for these cereals.

Their original health institute became the famous Battle Creek Sanitarium. One of the doctors at the sanitarium was named W. K. Kellogg. Dr. Kellogg, a devoted follower of the Seventh Day Adventists, was keenly interested in healthy diet and the effect of diet on sick patients. While seeking a foodstuff to replace bread in the diet of his patients, he stumbled into an answer that created an iconic American industry.

Dr. Kellog was boiling a pot of water that contained wheat. His attention became diverted and the wheat overcooked, thus softening. He removed the softened wheat and let it dry. When he returned later he found that the overcooked wheat had begun to turn brittle. He began to break apart the wheat and it broke off into little flakes. Amazingly, the wheat flakes had a most enticing taste. Dr. Kellogg had accidentally invented the process essential to mass-produce wheat cereals and corn flakes.

Today we know the Kellogg Company as one of America’s great brand names and purveyors of numerous popular breakfast cereals. The Kellogg Company was later followed by C. W. Post and General Mills in making the prepackaged breakfast cereal industry one that is uniquely American.

Dr. Kellogg spent the rest of his life seeking to create healthy products that would improve and extend life. However, the accidental discovery of the process necessary to produce dry cereals is his great legacy. Every day millions of people all over the world start their day with a tasty, nutritious bowl of cereal that owes its provenance to an overcooked pot of wheat.

Many great inventions and product improvements owe their existence to accidents, mistakes that open new doors and plain dumb luck. The key to commercially profiting from these errors is to always keep an open mind in the face of the unexpected. Dr. Kellogg was looking for a new type of bread. His mistake in overcooking a pot of wheat has contributed to making his name one of the most famous in the world.

Today we know Gillette to be one of the worlds most successful and highly respected consumer product brand names. The Gillette safety razor is ubiquitous in homes all over the world. The Company is now owned by Proctor & Gamble and continues to introduce new shaving innovations on a regular basis.

King C. Gillette was a travelling salesman, a bit of a bon vivant and a very ambitious entrepreneur. During his travels he fortuitously made the acquaintance of William Painter. Mr. Painter was the inventor of the Crown Cork bottle sealer. His invention was the impetus for the Crown Cork & Seal Company, hugely successful to this day. The inventor was almost messianic in his belief that the key to any successful invention was the ability to repeatedly re-sell the product to the same users. Mr. Gillette became enamored of the concept of “planned obsolescence” and began his quest for an invention that he could commercialize.

One day in 1895 while shaving Mr. Gillette had an idea. At that time shaving was an ungainly affair. The process required a bowl of drawn water, soap, brush, and a straight razor that needed to continually be stropped to maintain sharpness. King Gillette’s brainstorm was to design a razor that held a disposable steel blade. He would sell the razor as a fixture and the blades as refill products, over and over to the same customers.

There was a technical problem, however, that Gillette had to overcome. At that time it was considered near impossible to create a small metal blade that would hold a sharp edge for multiple shaves and be inexpensive. It took six years and the engineering skills of MIT graduate William Nickerson to create the technology to mass-produce disposable razor blades.

King Gillette was nothing if not dogged. However, it took the entry of the United States army into World War I to popularize the Gillette Safety Razor.

Mr. Gillette’s company was able to secure a contract with the government to distribute Gillette Safety Razors to every soldier. By the end of the war 3.5 millions razors and 32 million razor blades had been distributed to soldiers in the field.

When the Armistice to end the war was signed and the American soldiers returned home they imported the Gillette shaving habit with them. There was immediate demand created across the country for Gillette products. The future success of the company was assured and the Gillette brand became a cornerstone of the American consumer product marketplace.

My consumer product marketing consulting firm reviews hundreds of products each year. Recently we had the opportunity to analyze a wonderful beauty product accessory. The inventor had done a wonderful job of crafting the prototype and the features and benefits of the item were of excellent utility. However, the item was a one-time sale. There was no consumable, resale item included in the offering.

We advised the inventor of this obvious, limiting deficiency in the project. Retailers are reluctant to carry single items. Sales would initially spike and then dramatically slow as market penetration occurred. We offered to create a liquid “activator” product to be used in conjunction with the implement. The “activator” would be the razor blade, the hardware implement the equivalent of the Gillette razor. The “activator” was inexpensive to produce, had huge perceived value, completed and embellished the marketing story and offered retailers and the inventor the opportunity for a steady repeat sales stream. The product is now sold in thousands of beauty salons across the United States and in Europe.

The Gillette sales model is now so common that we take it for granted. “Planned obsolescence” is ubiquitous and insures brand loyalty for many years. The key to building a successful brand that consumers treat as generic is often to mate a fixture or implement with a consumable item. Gillette often gives away the razor to insure that the consumer must purchase their proprietary razor blades or cartridges. Ambitious entrepreneurs should always seek to extend their products reach by incorporating King Gillette’s model.

The hundreds of entrepreneurs, inventors and small businesses that approach my marketing consulting firm each year with new product ideas all confront the same, basic hurdles in attempting to achieve commercial success. Issue number one, they perceive, is how to fund the project. Issue number two, how to market their product.

Let’s review the marketing options. Invariably, the bulk of the entities we work with approach marketing with the belief that they need to immediately place their product in big box retailers. This is a laudable long-term goal, but almost always would be the kiss of death for new products and startup companies.

Big box retailers are exceedingly demanding in requiring huge levels of logistical support. The technology required to simply process orders, data entry, shipping, receiving and billing is highly technical and specific to each chain. The software and systems required to communicate with these giants can be prohibitively expensive for new, small vendors. These are just the logistical hurdles. The sell-through and marketing challenges are much more difficult to conquer.

The alternative to running off to Best Buy or Wal-Mart is to utilize “guerilla marketing” strategies to mitigate expense, lower risk and insure that the new product has a fair opportunity to achieve success. In recent years we have begun to use a “backdoor strategy” to push products into big box store distribution without confronting the up-front challenges that are so daunting for new companies.

Here is an example. Recently we had a dentist approach our consulting firm with a very novel stylized toothbrush. He had deduced from his dental practice that people typically did not brush for three minutes, twice daily, as recommended by the American Dental Association. They really did not know how long they brushed, but the gum and tooth problems he was confronting in his patients indicated they were not brushing enough each day. His new toothbrush was cleverly designed to address this deficiency in oral wellness.

The dentist typically wanted us to create a marketing strategy for the toothbrush that would place the units on mass-market store shelves for the launch. We explained the difficulties, risks and expenses involved in such a strategy and why he should consider alternatives. This was when we described the “backdoor” option.

Big box chains have local and regional management structures. Most people believe that all new items are purchased through home office buyers or merchants. For example, Bentonville, AK is the home office for Wal-Mart. Troy, MI is the buying office for K-Mart. JC Penney is bought out of Plano, TX. Walgreen is located in Deerfield, IL. The Kroger Company is located in Cincinnati, OH.

Each of these, and other national chains in every retail category, have local managers that have the authority to bring product into their doors on a local basis. Few people realize this. These local, regional managers can cut purchase orders and by-pass the national buying process that can be so vexing.

We packaged the novel toothbrush, had our graphic designer create a pop-up shelf display with a header card, created sales collateral and presented the item to the regional manager of a national drug store chain. He was responsible for 36 stores in two southeastern states. He loved the item and even commented, “we love to show the home office that they miss on too many neat products”. We left the meeting with a hand written purchase order for 144 pieces of the toothbrush for each store.

To support the launch of the product we wrote copy for a 30-second television spot with a tag for the drug chain. We went to the local cable television studio and they produced the spot for nothing, in lieu of our buying a small cable spot schedule. The dentist, in his smock, was the on air expert detailing the product.

The product was shipped to the 36 individual stores and the regional manager had forwarded a merchandising directive to each store manager. He advised the product was scheduled for delivery, end cap display was to be provided and that there was cable television buy to support the launch. We hired a college student to get to the stores and make sure the merchandise was prominently displayed and rotated.

Every few days we checked in with the regional manager and he provided sales updates. Within a week, he was able to project turnover and re-order needs. As soon as we secured re-orders, we had the regional manager call the home office with his sell-through report. Within two months we were invited into the buying office for a corporate presentation and to plan a national product launch.

We have used this “backdoor approach” a number of times with different products in different retail channels. It works. Local managers love to take successes, their discoveries, to the home office to prove their mettle. Our clients are in a much stronger position to negotiate terms with national retailers when we have already proven sell-through success on local, test market basis. It also enables us to extrapolate chain wide sales projections based on hard numbers, not best guess assumptions. This is a powerful strategy and many more entrepreneurs should take advantage of this approach that mitigates their exposure.

Licensing, bootstrapping, partnering, joint venturing and receivable financing/factoring are other alternative strategies that can be employed to launch new products. The most successful entrepreneurs overturn every stone to find the one route that will get their idea into play. Keeping all options open is essential if you are to realize your goals.